Financial technology consolidates innovative business models with technology to disrupt the financial services sector. The services provided are analogous to traditional banks. Among them are mobile payments, peer-to-peer lending, money transfers, investments and e-commerce. The most commonly used online payment platform consist the likes of PayPal, Klarna, SoFi and so on.
The Chinese app, WeChat Pay even allows consumers to pay for their shopping and ride hail. WeChat Pay will undergo expansion by launching in Europe. Ant Financial, the payments affiliate of Alibaba has boasted that its daily active users have doubled in the 2017 year to end March. Evidently, the popularity of the fintech industry is skyrocketing.
The Popularity of Fintech
There are primarily 3 factors in which the public are opting for the services of fintech firms namely excellent customer service, simplicity and convenience.
Excellent Customer Service
Fintech sector prides itself in being able to provide excellent customer service by utilizing Big Data. With enhanced computing power as well as advanced data analytics, these firms are able to improve customer engagement by tailoring its services for each of its consumers.
Zopa, UK’s major peer-to-peer lending service is able to connect borrowers with lenders through a website without taking on any balance sheet risk. Earlier this year, Zopa announced plans to alter its business model by launching an Innovative Finance Isa, a savings product. This product allows investors to hold their peer-to-peer loans within a tax-efficient Isa wrapper. Investors will be offered a target return of 3.9% after fees as compared to the 3.7% offer on Zopa’s current classic investment product.
In addition, Zopa has also received FCA approval which will further boost public confidence towards the lending platform. For loans taken out in banks, huge premiums must be paid out for the title for each time that a mortgage is being refinanced. Besides that, banks usually do not allow even their major clients to pay down their credit line whenever there are cash inflows which is a huge inconvenience.
For money transfers, consumers can go on Transferwise which allows its users to transfer overseas for a fraction of the charge applied by many banks. Therefore, the added incentives provided by fintech firms makes the switch from traditional financial institutions an easy option for consumers.
In this digital age, the ownership of a smartphone is becoming ubiquitous in our society. Financial services can now be provided with just a few clicks and swipes on our smartphones. Paym partnered with 15 banks and building societies allowing users to transfer money on their smartphone. Banks have realised that its existing legacy system cannot compete with these fintech firms.
Barclays bank has developed its own mobile payment app, Pingit. Account holders can make a payment using the transferee’s mobile number. The payment will be sent to the transferee’s bank account.
Long gone are the days where money transfers required visits to the banks which could take up a significant portion of the time from our day. Recently, PayPal, the mobile payment platform has announced its partnership with Skype allowing users in 22 countries to send money through Skype. This collaboration will increase the number of users on both Paypal and Skype.
Fintech also makes complex financial services simple for the everyday consumer. eToro, the self-dubbed world’s leading social investment network focuses on keeping things simple for its users to be able to understand the fundamentals of trading. By incorporating a social element to trading, users can benefit from other people’s knowledge as well as sharing what they know.
Users are able to trade and invest in stocks, currencies, indices and commodities making investing in the world’s most popular financial markets easier. Without these innovations from fintech firms, trading will only be reserved for the elites of the society who can afford to engage with professional traders to increase their personal wealth.
Implications of Banking Exodus
Fintech firms are taking the financial services sector by storm and achieving their primary goal of disrupting the industry. Recently, the fear of a Brexit banking exodus has been looming over the City of London. Lloyd’s of London, the world’s biggest insurance market and Royal London are setting up subsidiaries outside the UK; investment banks with the likes of JP Morgan and Citigroup are actively exploring the relocation of key operations.
Even before the EU referendum, Jamie Dimon, chief executive of JP Morgan said that the bank could be forced to move jobs from the UK. JP Morgan is planning to buy an office building in Dublin big enough to host around 1,000 workers. Questions have been raised as to the implications of the banking exodus on the fintech industry.
Total Domination of the Financial Services Sector?
With these traditional financial institutions out of the way, it seems that the fintech industry will be a step closer towards dominating the entire financial services sector. However, such a conclusion fails to consider that further innovation from fintech firms will require heavy investment. Commonly, major banks will attempt to acquire startup to improve its legacy systems. Both traditional financial institutions and fintech start-ups can collaborate to continually improve the banking experience for consumers.
According to Lawrence Summers of Financial Times, fintech can significantly reduce the friction in the financial services sector. To reiterate, fintech does not intend to replace these traditional financial institutions but only aims to disrupt the sector. Although fintech firms are becoming increasingly recognised by regulatory bodies as legitimate financial services providers, public confidence towards the industry is still not sufficient for consumers to make a complete switch from traditional financial institutions.
Will a Fintech Exodus Follow Suit?
The other eventuality is whether a fintech exodus will follow suit. The newly elected French President, Emmanuel Macron, a former Rothschild banker and will have the financial industry at the forefront of his policies is keen to see the He is also keen to see the fintech industry in France and has met up with UK Prime Minister, Theresa May and expressed his intentions to draw talents and expertise from across many fields from London. Macron has pledged €10bn to an innovation fund in hopes of turning France into a start-up nation.
Besides that, he also attended the “F Station” in Paris, the world’s biggest startup campus. There are multiple attractive factors for fintech firms to set up shop in France such as it would be under less regulatory scrutiny. It is easier for fintech firms to apply and e-money licenses and will continue to receive tremendous government backing under the leadership of Macron.
Despite this, a 2017 Deloitte study has ranked Paris 20th among global fintech hubs and seventh in Europe. London ranked top in the study. Among the factors cited was the rigid labour laws, political aversion to financial services and the lack of legal and financial ecosystem to rival London. London’s deputy mayor for business and enterprise, Rajesh Agrawal claims that as London is the world’s greatest financial centre and also home to one of the biggest tech hubs, these factors cannot be reproduced in Paris or anywhere else in Europe.
Even the French founder of private equity giant Ardian disputes that Paris will be able to dethrone London to be the new global fintech hub and says that, “London has always been the number one financial city in Europe, [and Brexit] will not change the situation for me. It will still be London… French people are less financially minded.”
Macron will need a whole lot more to charm these fintech firms to convince them to relocate its operations to Paris. In a recent article by Reuters, many start ups claim that the most important change Macron can make is to loosen the strict employment regulations as it would be difficult to recruit as well as terminate employment. Alain Flays, CEO of mobile payments startup, YoYo Wallet claims that if Macron continues to pay visits to incubators, converse in English as well as fully appreciate the creation of jobs this sector will be able to create, he will definitely be able to attract young people from all over Europe.
To avoid the draining of talent pool from the UK, it all boils down to the negotiations between the UK and EU regulators. A report by the House of Lords on Brexit on the financial services urges the government to finalise a transitional period to prevent the fintech firms from relocating to other parts of Europe. The effects of the absence of clarity can be seen by the banking exodus from the City of London. One of the key considerations for the financial services sector to retain its passporting rights.
Passporting rights are crucial for the fintech sector because companies are allowed to sell financial products across the Single Market without gaining regulatory approval from every Member State. The report also advises that if the passporting regime cannot be maintained, the government should seek to strengthen the current equivalence provisions for third country access or consequently the UK government must put weightier consideration into paying a fee for the financial services sector to still be able to tap into the Single Market. Theresa May advocates that “no deal is better than a bad deal”. However, she must seriously consider the implications of a no deal arrangement.
News source: The Market Mogul